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Monday, May 4, 2015

Is "social enterprise" just a buzzword?

I wrote the following post back in October but never ended up publishing it.... I'm not sure why I forgot about it! Updated notes in []

Yesterday [25 October 2014] I went to Cambodia's annual Social Enterprise Conference at the Royal University of Phnom Penh (RUPP) with my friend and coworker Sothea. I have to admit I didn't expect much, but it turned out to be more interesting than I anticipated.

Sothea was excited for the conference. I'm pretty sure she's going to start her own business some day.

A lot of this conference focused on whether or not an NGO should run a social enterprise and what that might look like. In the morning, there was a debate with panelists working in this field, and in the afternoon, I joined a session discussing the mechanics of an NGO starting up a social enterprise. The problem with this debate was that "social enterprise" was not well-defined--it was clear to me that the two sides were not really disagreeing with each other, but were defining "social enterprise" differently. In fact, the definition was so unclear that during the Q&A session after the debate, a Cambodian student asked, "What is 'social enterprise,' exactly?"

The short answer, I suppose, is that a social enterprise is a business that aims to better society in some way. But some of these NGOs seem to think you don't need to be turning a profit to qualify. And lots of businesses better society without the "social enterprise" tagline. For example, a soap manufacturer is selling a product that improves hygiene and keeps people healthy, but I don't think Unilever or Proctor & Gamble would call themselves a social enterprise.

I have to say, the "against" side really kicked the "for" side's butt. The against side pointed out that businesses run by NGOs can distort the market through multiple mechanisms. Maybe because Friends International was sitting on the "for" panel, they got the brunt of the criticism. The against side pointed out that Friends was cross-subsidizing their failing businesses (for example, a welding enterprise) with donations to the NGO. Other competing businesses would not have such a safety net. Additionally, with an NGO subsidizing the business expenses, the enterprises are able to sell their products and services below market rate, thereby (artificially) driving down the prices for everybody and harming competing businesses--the very businesses Friends is supposedly training their students to go out and work for (not to mention that the people at those businesses need jobs, too).

I was also shocked to learn that Friends International does not pay the staff of its restaurants because they are providing those staff with vocational training to work in restaurants. How is this not slavery? All staff at any restaurant, "social" or not, have to receive training. How is it acceptable to not pay employees just because you're giving them training? I must be misunderstanding what's going on, but Friends did not deny anything when the other side of the debate accused them of this no-paying behavior--and you'd think they would have denied such behavior if it weren't true. The "against" side pointed out that not paying their employees was giving Friends Restaurant a competitive advantage over other restaurants, because they had eliminated a major expense that others could not eliminate (not to mention they can charge way higher prices by advertising to foreign tourists as a social enterprise).

However, the "against" panelists were not opposed to an NGO starting a spin-off business. In fact, they recognized that an NGO might really understand a community's needs and devise an innovative market-based solution--but that spin-off business should be run as a for-profit business separate from the non-profit NGO, subject to market forces and responsible for all its own business expenses. I 100% agree with this.

During a separate discussion session after the debate, one of the topics was whether a social enterprise should register with the government as a for-profit business or a non-profit organization. The benefit of registering as a non-profit, of course, is that non-profits do not pay taxes. But if you're an enterprise aiming to turn a profit, how is it possibly acceptable to register as a non-profit? Some were arguing that because a social mission is the first priority of a "social enterprise," the company won't engage in any nefarious cost-reducing activities (e.g. corruption and corner-cutting) so they won't be able to compete with other companies that do engage in those activities. Well, my response to that is evading taxes makes you no better than the logger who bribes an official or the construction company that skimps on concrete. Taxes have a social purpose, they keep society running, they pay for education, health care, infrastructure, etc (yes much of it is lost to corruption in Cambodia, but still! paying your taxes is the right thing to do!). You have to beat the competition with a better-value product or service, not by cheating the system.

One person in this discussion brought up the idea that there should be a third category of registration for social enterprises, with some tax breaks and other concessions but not as much as given to an NGO. I call bullpoop. This would be ripe for corruption. Social enterprise is so ill-defined, how can you possibly determine if a company would qualify? How would you differentiate between Unilever, which sells hand soap, and WaterSHED Ventures, which sells a plumbing-free handwashing station? Plus, anybody could claim a social mission and cheat the system. For-profit and non-profit are fairly well-defined, and an organization needs to be honest about which category they really belong to.

Here I am admonishing people who think it's ok to register a "social" business as a non-profit in order to gain a competitive advantage by evading taxes.

Something that really bothers me about social enterprise in Cambodia is that many people still have this mindset that you need to get the money from (relatively) rich Westerners. There is a pattern of NGOs starting restaurants and handicraft shops targeting foreigners to fund completely unrelated, traditional NGO-type activities, often while claiming that they have provided "training" to underprivileged Cambodians to provide the food or product to foreigners--they are basically turning tourists into donors, still looking to outsiders for support.

This is very different from the social enterprises I'm used to in India. Indian social enterprises are selling products and services to the communities they are trying to help (check out Villgro for some examples). In India, social enterprises treat people at the "bottom of the pyramid" as consumers rather than as beneficiaries of donations or programs; in Cambodia, many social enterprises still see the poor as beneficiaries and foreigners as the only viable consumers.

But treating people like consumers empowers them to make their own decisions about what they need and want. And if they choose their own products and services, if they invest their own money, they are much more likely to actually use these products and services. The poor are often willing to spend, or take out loans, more than you might think--the poor are viable consumers, you can build a successful business by selling to the poor. Cambodian social enterprises need to stop emulating the donor model.

(Not-so-side note: many of these outward-looking enterprises seemed to be dreamed up by foreigners, not by Cambodians. If Cambodians in Phnom Penh had access to the same resources as Indians in Bangalore, I bet the Cambodian social enterprise sector would look a lot more like India's. Perhaps part of the problem is that many of Cambodia's social enterprises aren't truly homegrown, but started and run by expats.)

The restaurant thing in particular I don't get. How is Friends Restaurant "social" but other restaurants are not? I'm writing this blog post from Xotique Coffee and Bakery, which as far as I know does not define itself as a social enterprise. But most employees here are working to pay for their college education, and they regularly come over to my and other foreigners' tables to practice their English--working at this cafe both pays for college and enhances English skills, which are essential in today's job market. Certainly then Xotique is providing people with an opportunity to improve their lives. Is that not a positive "social" cause? Why is Friends' restaurant any different, any more social? Why should Friends' restaurant get out of paying taxes but not Xotique? I guess this goes back to my point that "social enterprise" is nebulously defined--and that might render it a meaningless buzzword.

How can we define this term so that it actually means something? What does social enterprise mean to you? And is it a problem that it means something different to everyone, or should we be working towards a single definition that everyone can agree on? Or is a definition not even that important? And what can be done to promote social enterprises in Cambodia that don't focus on foreigners, that grow their business targeting Cambodian consumers?

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About Me

I'm one of those weird kurta-wearing, broken Hindi-speaking Americans who can't get enough of India. From 2007 to 2013, I spent a cumulative 3 years in India, living in Pondicherry, Delhi, Shimla, and Varanasi, conducting field work in Himachal Pradesh, Punjab, Gujarat, Maharashtra, and Jharkhand, and visiting 26 out of 28 states (err, 29 once Telangana is official!). I recently completed a mechanical engineering master's degree, and for my thesis I worked on irrigation technology for smallholder farmers in eastern India. Now that I've graduated, I have moved to a new region of the world: Indochina. I work as a product designer at an organization in Phnom Penh that tackles water and sanitation challenges in rural Cambodia and Vietnam using market-based approaches (I should probably change "autorickshaw" to "tuk tuk" in my blog title). In this blog I write about my experiences and my thoughts on development issues. I took the title photo in a village in Kachchh, Gujarat in July 2011.